Businesses are categorized for tax purposes, based on whether they operate for profit, or they as exist as a nonprofit entity. Within the latter grouping there are many types of nonprofits that are subject to varying tax rules, depending on the specifics of their organization. Publication 557 from the Internal Revenue Service details the tax code regulations for organizations and breaks the nonprofit types into 29 different segments under section 501(c).

Understanding Nonprofit vs. Profit

In order for an organization to fall into a nonprofit classification, it must operate and provide its services without the primary goal of making money. Yes, they make money, but only to the end that they pay reasonable salaries to their employees, engage in the range of operations as defined by their organization, and pay the expenses incurred for doing so. In general, they operate solely for the benefit of the public and not anyone directly associated with the organization.

In contrast, for-profit organizations seek to gain a return on their investments and to make money for their organization and shareholders. When a company's balance sheet shows a profit, they make distributions to their shareholders or take other steps to grow their business. Most businesses that offer goods and services to the public operate for profit. Examples of types of profit organizations include restaurants, retail establishments and real estate and insurance companies.

Charitable Organizations are Tax Exempt

Under section 501(c) of the IRS tax code, nonprofits operating as charitable organizations by providing services solely to benefit the public are exempt from paying federal income tax. There are 29 categories of organizations that fall under this section of the code. Most frequently, people come into contact with organizations that are categorized as 501(c)(3) nonprofits. Nonprofit organization examples in this category include those that pursue charitable, religious or educational causes, scientific or literary functions, testing for public safety services, fostering national or international amateur sports competitions or working toward the prevention of cruelty to animals or children. For the most part, with a few exceptions, only 501(c)(3) organizations can issue tax deductible receipts for their donors' contributions.

Public Charities and Private Foundations

As the largest category among nonprofit types, organizations designated at 501(c)(3) nonprofits divide into two segments. Public charities receive the funds from a large base of donors, including individuals, corporations and possibly governmental grants. Examples of this type include schools, hospitals, churches and charitable organizations that serve the public, perhaps through support of the arts, funding medical research or championing human rights causes. Although they may support similar causes, the funds for private foundations come from private families, individuals or a corporation. They use their money to provide grants to other organizations. An example of a private foundation is the Bill and Melinda Gates Foundation.

Business Improvement Organizations

Business organizations receive a break under section 501(c)(6) which allows for business leagues, chambers of commerce and real estate boards to receive a nonprofit tax exemption. A business league is any association of individuals engaged in the same profession or industry who seek to promote their industry or business interests in their community. Similarly, chambers of commerce are organizations that typically promote the business success of all companies within their geographic region. These groups do not exist to promote any one business or product, but seek to improve the business environment for all its members. As such, they are allowed to engage in political activity or lobbying, as long as it is not extensive and only seeks to promote their organizational goals.

Nonprofit Tax Code Guidelines

IRS Publication 557 has a complete listing of categories for nonprofit organizations. Other categories include social and recreational clubs, civic leagues and social welfare groups, domestic fraternal societies and associations, and state-chartered credit unions, among others. The guide also explains applicable tax regulations, such as allowable exemptions, filing requirements and information as to whether donations to the organization are tax deductible.

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About the Author

Elisabeth Natter is a business owner and professional writer. She has done public relations work for several nonprofit organizations and currently creates content for clients of her suburban Philadelphia communications and IT solutions company. Her writing is often focused on small business issues and best practices for organizations. Her work has appeared in the business sections of bizfluent, azcentral and Happenings Media. She holds a Bachelor of Arts degree in journalism from Temple University.

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Natter, Elisabeth. (2018, October 25). Different Types of Nonprofit Organizations. Small Business - Chron.com. Retrieved from http://smallbusiness.chron.com/different-types-nonprofit-organizations-55899.html